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According to our estimates, GGP‘s core operating income is insufficient in regards to meeting its dividends obligations (assuming constant dividend declaration at $0.50 per share) in the coming quarters through operating cash flows. The company would have to draw down its existing cash reserves or finance its dividends through additional re-financing (note that we have increased dividend by $10 mn per quarter to include the impact of additional shares issued by the company - without such an increase the dividend payout will drop by default due to the dilutive effect of management's financing efforts). Such actions are unsustainable, thus it is fair to say that the current dividend is at short term risk unless financed through means other than company operations, and is at long term peril regardless of the company's actions. The table above depicts the 2Q2008 in which GGP would have to finance all of its dividend payment through cash reserves (which stand at a healthy $256 mn at the end of 1Q2008 due to issuance of equity stock of $88 mn and an unsustainable increase in NOI partly due to higher lease termination fee). In 3Q2008 and 4Q2008, company's operating activities would be able to finance only 47% and 59% of its dividend with the balance coming from financing activities.

Sensitivity analysis

We have conducted a sensitivity analysis of GGP's expected cash balance at each period-end based on varying dividend per share amount and re-financing options available to the company. We have also done a separate similar analysis based on varying dividend per share amount and GGP's capex requirements (maintenance as well as development capex). Also for 2Q2008 we have reduced estimated re-financing from our previous estimate to the extent of the company's reported surplus cash in 1Q2008 versus our original estimates ($210 mn including $88 mn from equity issued by the company and over $100 mn from more-than-projected NOI in 1Q2008, see my previous post for the source of this unexpected income). In effect, we have maintained our total refinancing requirements over 1Q2008 through the projected period and have kept other assumptions of the model constant. GGP is, in essence, taking money out of one pocket to put in the other, and reporting an increase in income in the process. This is not how we see it.

Based on the sensitivity analysis, we estimate GGP to fall short of $22 mn in cash liquidity at the end of 2Q2008 if it were able to re-finance $1,146 mn during the quarter while keeping its dividend constant at $0.50 per share. GGP will have to either increase its re-financing requirement by additional $54 mn to $1200 mn or cut its dividend to $35 per share to overcome this cash crunch. Due to the nature of the typical income orientated REIT investor, such a dramatic cut in dividend will result in a drastic sell off and reduction in share price and value. Alternatively, GGP can also reduce its capex requirement by $45 mn in 2Q2008. Any reduction in capex either reduces the future value of existing properties or reduces the future cash streams of projects in the pipeline - both of which reduces the intrinsic value of the company. Since a cut in dividend in the near-term would hamper GGP's image in the current environment the company would most likely take steps to avert it, thus we expect GGP to further destroy corporate value in an effort to take the actions necessary to maintain its dividend "by any means necessary". Given the current real estate scenario, we believe that GGP would find it difficult to execute additional re-financings to fund its dividend payments, and if it should succeed in finding lenders bold (or silly) enough to mortgage dividend payments, investors should be aware GGP that would be simply borrowing off of its extant equity base to issue a dividend. Such dividends would not be the result of profits from the company, but the result of cannibalization of property equity and furthering of GGP's debt woes - which are already quite significant as it is. Needless to say, such an action is unsustainable.

Dividend sensitivity analysis - Dividend per share, re-financing and cash at the end of year

Green cell e

quals Current model assumptions

Re-financing in 2Q2008

-22

1,000

1,050

1,100

1,146

1,200

1,250

1,300

Dividend (2Q2008)

0.20

(88)

(38)

12

58

112

162

212

0.35

(128)

(78)

(28)

18

72

122

172

0.50

(168)

(118)

(68)

(22)

32

82

132

0.65

(208)

(158)

(108)

(62)

(8)

42

92

0.80

(248)

(198)

(148)

(102)

(48)

2

52

Re-financing in 3Q2008

-13

1,200

1,250

1,300

1,358

1,400

1,450

1,500

Dividend (3Q2008)

0.20

(91)

(41)

9

67

109

159

209

0.35

(131)

(81)

(31)

27

69

119

169

0.50

(171)

(121)

(71)

(13)

29

79

129

0.65

(211)

(161)

(111)

(53)

(11)

39

89

0.80

(251)

(201)

(151)

(93)

(51)

(1)

49

Re-financing in 4Q2008

17

1,200

1,250

1,300

1,358

1,400

1,450

1,500

Dividend (4Q2008)

0.20

(61)

(11)

39

97

139

189

239

0.35

(101)

(51)

(1)

57

99

149

199

0.50

(141)

(91)

(41)

17

59

109

159

0.65

(181)

(131)

(81)

(23)

19

69

119

0.80

(221)

(171)

(121)

(63)

(21)

29

79

Re-financing in 2009

-51

5,300

5,400

5,500

5,661

5,700

5,800

5,900

Dividend (2009)

0.80

(92)

8

108

269

308

408

508

1.40

(252)

(152)

(52)

109

148

248

348

2.00

(412)

(312)

(212)

(51)

(12)

88

188

2.60

(572)

(472)

(372)

(211)

(172)

(72)

28

3.20

(732)

(632)

(532)

(371)

(332)

(232)

(132)

Dividend sensitivity analysis - Dividend per share, Capex and cash at the end of year